Time for champagne, not bubbles

The party started with Netscape’s initial public offering. The first words out of everyone’s mouths that day were: “Is Netscape worth more than Apple Computer?” The second words were: “Did that college kid, Marc Andreessen, really make $70m?” That was like the first beer out of the keg at the wild, drunken frat party. Before the night was over, there would be police, a pool accident, a car in a tree and singing on the roof. It was too wild to recount here. For a while during the summer of 1998, it looked as if the party would come crashing down. Long Term Capital Management and the Asians were like the police busting up everything. But when we paid them off and they went away and the neighbours shut their windows and put in earplugs, the party began to rage again starting with theglobe.com’s IPO in late summer, 1998.

When it was finally over, the first tears were mine. I had started a company, Vaultus, which still exists today, that was a roll-up in the wireless software space. We raised money from a string of notables, including Henry Kravis, CMGI, Investcorp, Frank Quattrone, Sam Waksal, and, unfortunately, Yassir Arafat, although we didn’t realise that last one until much later. Banks were coming in and pitching our IPO and the final page on the Powerpoints usually had me worth somewhere north of $200m post-IPO. It was so intoxicating I almost had to check myself into Promises (Linsday Lohan’s rehab clinic) to deal with my net worth addiction.

Of course, everything came crashing down. The party didn’t just land with a thud. A full-out fire burnt down the entire house. I never want to relive that pain again. That is why I’m annoyed right now. With Blackstone’s IPO a success last Friday, the whispers started up again. Is this a bubble? Is this calling a top? The answer is No and No. It’s a bubble when companies that have just started, have no future prospects, and make no money, start going public in droves and everyone starts trading them up. We are so far from that it’s ridiculous. Blackstone makes billions of dollars in income and has a direct invitation to start buying up companies at cheap prices all over China. In the venture capital world, we had a joke that entrepreneurs pitching their stories would always use “Chinese maths”. In other words, they would pitch their idea for a new type of refrigerator and then conclude with, “and if only 1 per cent of the people in China buy our refrigerator, this could be a huge home run”. And, of course, those numbers would be ridiculous. Except in the case of Blackstone, which actually has a hand-engraved invitation from the Chinese government to come and go a little crazy all over the mainland.

But rather than plunging head first and buying shares of BX now that it is public, let’s take the back door route into Blackstone. Most people think of Blackstone as a private equity fund but it also recently opened up a hedge fund: Blackstone Kailix Advisors. Blackstone regularly files with the Securities and Exchange Commission, detailing the holdings of this fund. Interestingly, the fund has a lot of overlap with T. Boone Pickens’ hedge fund, which suggests that the folks at Blackstone are believers in peak oil theory, the idea that the world is running out of its supply of cheap crude oil and will have to find more innovative (and expensive) ways to drill for, produce and transport energy.

For instance, both Blackstone Kailix and T. Boone Pickens own offshore drilling company, Global Santa Fe . It provides offshore drilling services, rigs, logistics services and so forth, and also drills and explores on its own for gas and oil. It has rigs in the Gulf of Mexico, south-east Asia, the North Sea, all over the world. As it gets more expensive to drill in the Middle East, the offshore world opens up an entire world to drill and explore for oil and gas. Companies such as Global Santa Fe ride that boom. Additionally, it trades at a forward price/earnings ratio of only eight and has a 1.2 per cent dividend that has risen steadily ever since it went public in 1997.

Another stock owned by both Blackstone and T. Boone Pickens is Transocean . It is in the same exact business, has similar fundamentals, a forward p/e of nine, and drills in similar locations. The fact that both stocks are in both funds shows that they are not being so discerning in terms of the individual companies but are making a broad demographic bet that the services provided by these companies will be in great demand in the future.

Don’t waste time worrying about whether or not we’re entering another bubble. My view is that even if the party is just beginning (which I think it is), sit back, enjoy the pool, listen to the music and start looking for clues on where the next opportunities lie. IPOs such as Blackstone help point the way.

james@formulacapital.com